January's end is now official. With it having come and gone, should that signal the end of all optimism? In other words, does that mean its famed effect should now be over? On Tuesday, stocks finished a bit lower after having traded in what appeared as a narrow range for most of the day. Early on equities were boosted by more European progress as union leaders arrived at a new fiscal agreement. However, it seems the investors were hampered by the arrival of news related to U.S. housing and manufacturing that arrived worse than expected. It seems this is an every week occurrence, yet the indices kept rising the entire month.
The market still appears undecided about which news should matter the most - should it be foreign or domestic? It seems although the equity markets are doing well - this is in spite of a poor reading on U.S. consumer confidence for January where it fell to 61.4 and down from 64.8 in December - this is while most economists were expecting 68.0. This was the bad news. The good news is, despite this less than stellar end to the month, the indices saw their best January gains in over a decade.
For the month of January, the Dow rose 3.4 percent, while the S&P500 gained 4.4 percent. You would have to go back 15 years since both indices saw better performance to start a year. As for the Nasdaq, it rose 1.90 points to close at 2,813.84 - thus netting 8 percent for the month, its best January since 2001. Investors continue to be encouraged by what have been "modest" improvements in the economy, but it is clear that there are still some major concerns. The consumer confidence number of 61.1 is what really tells the story and I have to think that some of these major concerns continue to be rising gas prices and personal incomes.
With all of the major indices having shown strong evidence that the January effect was indeed real, let's take a look at some stocks that contributed to their gains and determine if they should continue to be held - why and why not.
Sirius XM (SIRI) - Target $2.50
The love-hate relationship with Sirius XM continues. Sometimes the stock has made me look extraordinarily smart and other times, incredibly stupid. Right now I'm not exactly sure which definition to assume just yet. My mere mention of Sirius continues to irk some investors for reasons that I can only describe as unexplainable. But the fact remains - the stock has been a great source of frustration for quite a few people and an excellent gauge of investor resolve.
Last week, I was "this close" to selling a half of my position at $2.19 when it was clear that the stock had hit a wall. I mentioned this in two separate articles. But in true amateurish fashion, I went against my better judgment and held. Having applied the 10 cent rule for many years, not selling ended up costing me an extra 5,000 shares. Basically, these were shares that I could have purchased lower at any point under $2.10.
The question is, is it time to sell Sirius? The clear and intelligent answer is no - especially not before earnings which the company is due to report on February 9. Full year guidance, along with further plans to return value to shareholders, will determine what the direction the stock takes. Consensus subscriber estimates stands at 1.5 million net additions and I am hoping Sirius guides well above that figure. With the stock having gained at one point almost 20 percent on the year, I am not ready to sell just yet, but I do need more reasons to add and/or hold on to what I've got. In seven more trading days, I'll get my answer one way or another.
Apple (AAPL) - Target $550
Apple is heading to $600 but $550 not only sounds more realistic, but it makes me sound more grounded. I would like to say that the euphoria sparked by its recent earnings announcement is over, but that would be very pre-mature. On Tuesday the stock continued to show increasing viability as it reached another 52 week high of $458. The company only needs to achieve roughly 12 to 15 percent annual revenue growth for the next couple of years and it will be able to generate almost $180 billion in annual revenue.
Assuming a declining ratio of free cash flow conversion, Apple could end 2015 with nearly $39 billion in free cash flow. Assuming 6 percent cash flow growth beyond that, a market-matching discount rate, and adding in the cash on the balance sheet, suggests a target upwards of $600 to $650. So this expectation continues to be the reason for the continual rise of the stock. For Apple, the January effect may likely extend to a "2012 effect" for the sheer fact that remarkably, with every new 52 week high, the stock still looks incredibly cheap.
Bank of America (BAC) - Target $10
With Bank of America's fourth quarter earnings announcement, Wall Street received an answer to one of its pressing questions for most of 2011 that plagued investors for most of 2011 - that is, would the bank be able to run its business effectively enough to make money? By Wall Street's reaction, I can only say that the reported profit of $2 billion for the quarter was a huge surprise because it came after having posted a loss of $1.2 billion during the same period last year.
The other question is, can it build on this momentum? As mentioned previously, it has not yet been able to fully maximize its branch leverage. This is even though the company reported over $1 trillion in customer deposits, which equates to approximately one out of every two households. If you couple this with the fact that it has approximately $2.2 trillion in assets, I continue to wonder just how undervalued its stock might still be if it only produces a 'decent' return on these assets.
On $2.2 trillion, a half percent to 1 percent return on assets would equate to net income in the area of $22 billion - thus making the stock pretty undervalued. Investors want to know with the stock being up 30 percent so far on the year, is it now time to sell being that the January effect might be over? I don't think so. I sense this is not only a beginning for a Bank of America recovery, but a rebound within the entire financial sector.
Cisco (CSCO) - Target $30
Based upon some of the projections that I have done, I have determined that Cisco's stock should be valued at $30. Not only does its current fundamental position support this valuation, but also the resurgence within the tech sector - particularly with what appears to be an increase in corporate IT expenditures - suggests that this is where the stock is likely heading next.
On Tuesday Auriga analysts said the following regarding Cisco:
In our view, Cisco's top- and bottom-line growth targets are looking increasingly conservative; we now expect the company to grow earnings at 10% CAGR over the next five years. For FY12/FY13, we raise our estimates as we expect Cisco to gain market share in multiple segments like switches, routers, set-top boxes and servers.
In our view, the recent re-organization has reinvigorated the sales force and streamlined decision making to create a much more efficient and nimble company. We expect Cisco to successfully transition its product/services portfolio to support software defined networks and public/private clouds, thereby ensuring sustainable long-term growth potential.
This is in stark contrast from its previous status of last year when it allowed lesser competition to encroach on its market share because it was so out of focus. However, focus is one thing the company is now demonstrating to have by its last earnings announcement.
Oracle (ORCL) - Target $35
Though the economy is said to be only slowly growing, one of the better gauges of just how effective the growth is has always been database giant Oracle. The stock took a beating in the fourth quarter of last year upon its earnings miss and comments made from CEO Larry Ellison that suggested "slowing demand". With the stock now trading just above $28, after having bounced off its low of $24.72 in August of last year, there is a new sense that aside from consumer confidence, there now is growing "corporate confidence."
In the quarter ending November 30, the company reported a profit of 54 cents per share while analysts were projecting profits of 57 cents. The bright side of the report was that new software sales rose slightly - 2 percent year-over-year to $2 billion. Management also added that it expects hard revenue declines of 5 percent and 15 percent while also projecting new software sales growth of flat to 10 percent.
Its growth projections currently place a valuation at $35 - this is even on the most conservative assumptions. The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications. Although the stock has displayed a nice rebound, it still has much room to grow and should be held.
Thank you for reading part one of this article, in part two we will discuss the stocks that should be sold or specifically, those in which profits are to be immediately locked.